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Russians Move To Formalize Armenian Power Grid Takeover

Սեպտեմբեր 12, 2005

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Russians Move To Formalize Armenian Power Grid Takeover

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By Emil Danielyan

Russia’s state-run power monopoly has moved to complete its shock takeover of Armenia’s electricity grid that has prompted serious concern from the United States and other Western donors, it emerged on Monday.

Armenia’s Public Service Regulatory Commission announced that the British-registered owner of the Electricity Networks of Armenia (ENA) has asked authorities in Yerevan to allow its formal sale to a little-known subsidiary of the RAO Unified Energy Systems (UES).

Midland Resources Holding’s ownership of ENA has been largely symbolic ever since it signed a 99-year “management contract” with the UES subsidiary called Interenergo BV last June. The Russians paid $73 million for the right to manage the Armenian power utility and use its profits.

UES initially claimed to have purchased ENA, but later clarified that the deal falls short of a formal acquisition. The Armenian government’s suspicious silence on the matter prompted sharp criticism from the World Bank and the U.S. government’s Agency for International Development (USAID) that have invested heavily in the decade-long reform of the country’s energy sector.

Officials from the two agencies demanded explanations from Yerevan, arguing that under the terms of ENA’s 2002 privatization Midland Resources can not sell it to any other firm without the Armenian government’s permission. They warned that the lack of transparency calls into question further Western loans and assistance to Armenia.

The warnings led the Armenian Energy Ministry and the Public Service Regulatory Commission to pledge to investigate the legality of the takeover. The commission concluded late last month that Midland and UES did not need a government permission for their deal because it did not entail a formal change of ownership at ENA. “Midland Resources Holding remains the owner of the 100 percent of the network’s shares,” its chairman, Robert Nazarian, told RFE/RL on August 29.

Nevertheless, Nazarian’s commission revealed that it received a letter from Midland on Thursday asking the Armenian authorities to approve the sale of its shares in ENA to the Russian giant. “The official message from the Midland Resources Holding company is being considered at the moment,” the regulatory body said in a statement.

The Energy Ministry, for its part, claims to be still examining the legality of the June deal. Its top officials have been unusually tight-lipped on the issue.

That ENA’s sale was always the ultimate goal of Midland’s dealings with UES was acknowledged last week by Alex Shnaider, the Canadian owner of the British-registered firm specializing in metals trade.

“The aim of the transaction is to sell 100 per cent of Midland’s shares in ENA to RAO [UES],” Shnaider told the London-based Institute for War and Peace Reporting (IWPR). “The deal is divided into two stages. First, in order to prepare for the transaction, both parties will study the company’s assets and create joint management provisions for the company in consultation with the Armenian government. During this stage, Midland will remain the sole owner of ENA’s shares.

“The second stage of the transaction will involve the transfer of the shares. This can only occur following approval from the government, as outlined in the initial contract between Midland and the government of the Republic of Armenia.”

The comments appeared on the IWPR's website on Friday, the day after Shnaider’s firm announced its intention to formally end its ownership of the Armenian power distribution network. The latter's acquisition by UES will lead to a near complete control of Armenia’s energy sector by the Russian state. UES, for example, already controls several big power plants that account for 80 percent of Armenia’s electricity production.

The Russian takeover of ENA followed months of speculation denied by Midland executives and Armenian government officials. Energy Minister Armen Movsisian publicly spoke out against the idea in March. He argued that selling the power grid to UES would run counter to one of the key aims of the sector’s reform: separation of units generating, transmitting and distributing electricity. The structural change has helped Armenia to end its crippling power shortages of the 1990s and even export electricity to neighboring Georgia and Iran.

The fact that Movsisian’s objections were eventually ignored suggests that the ENA deal may have been cut at the highest possible level. Local commentators note that Russian President Vladimir Putin visited Yerevan later in March and that the energy issue was high on the agenda of his talks with his Armenian counterpart Robert Kocharian.